Rethinking Your 401K Strategy

Do you contribute the maximum amount to your 401K? Is your employer matching at 100 percent?
For many responsible investors, the answers to those questions are yes … and then no. You’re contributing the maximum amount but your employer isn’t.
RadioShack reportedly became the latest employer to stop matching employee contributions, but it’s certainly not the only one. A growing number of companies seeking to save costs or avoid layoffs are electing to match a smaller share of worker 401K contributions … or stop matching altogether.
About the only good thing to come out of these employer cutbacks is that they give employees more options. To avoid leaving free money on the table, it almost always makes sense to contribute up to the level that your employer is matching, whether that be two, four or 10 percent.
But when your employer pulls back, you have some choices:
-Stay the course. If your employer is matching your contributions up to just two percent, and you’ve been saving 10 percent, there’s no real financial benefit to locking away that additional eight percent of your income. But if you’re someone who lacks the discipline or the organization to save regularly, this may be the best option for providing both peace of mind and a growing retirement portfolio. If generous employer matches were once the best thing about 401Ks, a close second is the automatic deductions. Because you never see the money, you’re less likely to miss it.
-Continue to max out, but with a post-tax Roth IRA. If you’re a fan of automatic savings, but fear being hit with fees if you need your money for a rainy day, you may want to consider cutting back on your 401K contributions and moving some of your money into a Roth IRA. While you pay into Roth IRAs with post-tax dollars and don’t receive the initial tax break provided by your 401K, you also won’t have to pay taxes on withdrawals before retirement. Saving via a Roth IRA can be ideal if you’re committed to saving not just for retirement but for other major life events that may come sooner, such as purchasing a home or sending a child to college.
-Cut back to the employer matching level and invest independently. It may seem like the smartest and safest option to continue to maximize your own 401K contributions, but this approach could cause you to miss out on other investments. In addition, it could also result in steep penalties and tax costs if you need to access the money prior to your retirement. When you decide to put less money into a 401K, you open up a multitude of other possibilities, from managing your own portfolio to making extra mortgage payments.
-Know your employer policy. Most important, keep on top of your employer’s practice. Companies commonly make changes to existing policies around the end of the year and these changes can be easy to miss. It’s great to automate retirement savings so that you don’t need to micromanage them, but it’s still important to check in from time to time.

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